The Center's work on 'Taxes' Issues

As states continue to turn the corner on the Great Recession, policymakers in a number of states are looking to help low-paid working families by creating or expanding refundable state earned income tax credits (EITCs). These credits build on the federal EITC, which promotes work, helps families make ends meet, lifts them out of poverty, and yields lasting benefits for kids, studies show.

States considering EITC expansions include:

Illinois, where lawmakers have proposed doubling the size of the EITC to 20 percent of the federal credit, helping around 1 million working households.

Massachusetts, where Governor Charlie Baker has proposed doubling the EITC to 30 percent of the federal credit, helping more than 400,000 working households. Meanwhile, bills proposed in both houses of the state legislature would boost the EITC to 50 percent of the federal credit.

Minnesota, where Governor Mark Dayton has proposed a new EITC expansion — on top of the large increase enacted last year — that would make another 30,000 working Minnesotans eligible and boost the credit for more than four in five current recipients.

Rhode Island, where Governor Gina Raimondo has proposed building off of last year’s EITC changes (which cut the credit to 10 percent of the federal EITC but made it fully refundable, producing a net gain for most recipients) by increasing the credit to 15 percent of the federal EITC.

Washington State, where Governor Jay Inslee has proposed funding the EITC, which the state enacted in 2008 but has never funded due to the recession, helping over 400,000 working households.

States considering new EITCs include:

California, which has the nation’s highest poverty rate under a poverty measure that accounts for taxes and non-cash benefits as well as cash income; a recent proposal to create an EITC would benefit around 3 million working households.

Montana, where families with poverty-level wages pay some of the nation’s highest state income taxes; a proposed EITC would benefit 80,000 working families.

A number of states improved their credits in 2014, as our updated paper explains. Most notably, the District of Columbia expanded the EITC for workers without dependent children in the home, an idea with bipartisan support at the federal level. Twenty-five states plus the District of Columbia have EITCs (see map).

States are smart to use one of our most effective tools to ensure working families recover along with the economy. State EITCs allow state lawmakers to leverage the power of the federal credit at a relatively low cost.

With the recession behind them, many states are reinvesting in their higher education systems, though funding remains far below pre-recession levels. A handful of states, however, have dug deeper budget holes with tax cuts — holes that they’re looking to their already beleaguered colleges and universities to help them fill.

Over the same period, Louisiana slashed per-student funding for higher education by 43 percent, second only to Arizona. Due largely to poor budgeting choices, the state faces a $1.6 billion shortfall in the upcoming fiscal year, which the governor plans to cover in part by cutting higher ed funding by another $211 million. The state’s finances would be in much better shape if it didn’t enact costly income tax cuts for the state’s highest earners just before the recession.

In Wisconsin, where tax cuts have cost the state nearly $2 billion in revenue over the past four years, lawmakers are considering another $300 million cut to the higher education system in the 2016 budget. Wisconsin has already cut per-student funding more than 20 percent, in inflation-adjusted terms, since the onset of the recession.

In Kansas, lawmakers actually increased higher education spending for the 2014-15 school year. However, due to a fiscal emergency caused by massive tax cuts that took effect two years ago, Governor Sam Brownback pared back the increase by $16 million, among other mid-year cuts. Between 2008 and 2014, after adjusting for inflation, the state had cut per-pupil funding by about 23 percent. Kansas is facing another huge budget gap for 2016, so more cuts for higher education and other state services likely are on the way.

These cuts may result in more tuition increases, reductions in faculty and administrative staff, cuts to course offerings, and other programmatic cuts that may lessen quality for students. As the economy continues to recover and revenues bounce back, states would do well to reject costly and ineffective tax cuts and instead reinvest additional resources into higher education and other important budget priorities.

Legislation is on a fast track in Kansas — poster child of the “slash income taxes for the wealthy and everything will be great” approach — that would replace the time-tested way of supporting schools with an arbitrary one that would fall far short of meeting growing needs. And unfortunately for the nation’s students, Kansas isn’t alone in shortchanging its schools.

Under the traditional school funding formula, Kansas — and nearly every other state — bases K-12 school funding in part on the number of students in a given school district and other needs. The Kansas legislature appears likely, perhaps as soon as tomorrow, to pass a bill to scrap that formula. Instead, in the next two years, schools would receive an arbitrary amount based not on school needs, but simply on how much the legislature wishes to appropriate. The bill doesn’t specify what will happen after that. Governor Sam Brownback proposed to dump the formula, so there’s little doubt that he’ll sign the bill.

That doesn’t bode well for the state’s schools. Because the new funding levels would not be required to keep up with enrollment changes and inflation, some schools — already hammered since the recession — would have to raise class sizes, lay off more teachers, and otherwise do less for kids (see chart).

Governor Brownback and his supporters call the new funding method a “block grant.” They claim it will give schools more “stability” since they’ll know how much funding they have to work with. The euphemistic language obscures the truth. In fact, the state would be undercutting its future to pay for the big tax cuts Brownback signed two years ago that went disproportionately to the wealthy. And by lifting the legislature’s obligation to give schools the money to keep up with growing needs, the “block grant” approach will help the state pay for additional tax cuts scheduled to kick in in future years.

Kansas isn’t the only big tax-cutting state that’s shirking its obligation on education. Last year, North Carolina — another of the big income tax-cutting states — dropped a provision in place since the Great Depression requiring the legislature to consider student enrollment changes when determining school funding. And Wisconsin Governor Scott Walker — another champion of the “tax cuts first” approach — wants to “block grant” and sharply cut funding for the state’s higher education system.

The damage that huge tax cuts will do to these states, and by extension the country as a whole, is becoming apparent. By charting a new, far less ambitious course for how they fund education, these states are promoting a diminished vision of our future.

In Minnesota, which raised income taxes on wealthy residents two years ago, revenues are surging beyond expectations, according to the state’s latest forecast. In contrast, Kansas, Wisconsin, and North Carolina — which cut income taxes in recent years — face serious fiscal problems, despite the promises of tax-cut supporters.

Minnesota’s Governor Mark Dayton secured a package of tax measures that included a new, higher income tax bracket for high-income households (over $250,000 for a married couple), with the revenues going to expand access to full-day kindergarten and make preschool and college more affordable. Opponents’ prediction that wealthy residents would flee the state in droves hasn’t materialized, and revenue growth has been stronger than expected.

As a result, Minnesota lawmakers this year are in the happy position of deciding what to do with the unexpected funds. Governor Dayton and some lawmakers want, among other things, to greatly improve child care support for working families. By helping many parents continue working, this would boost their long-term prospects and thereby benefit the state as a whole.

Kansas’ massive income tax cuts took effect the same day as Minnesota’s tax increase, but the legislative debate there is far from happy. Governor Sam Brownback and lawmakers are debating where to cut spending further in order to escape the fiscal crisis that the tax cuts helped create.

Already, Governor Brownback has imposed a new round of school funding cuts for this fiscal year. Revenues have come in lower than expected since the tax changes were enacted. To help finance the tax cuts, the state has spent down its only operating reserves, leaving it very vulnerable to the next recession. And bond rating agencies, disturbed by the fiscal mess, have lowered the state’s bond rating.

Similar news is emerging from Wisconsin and North Carolina, which also tried big tax cuts to expand their economies. Both states face major budget shortfalls for the coming fiscal year, which may mean more cuts to schools and other services already badly damaged by the recession.

In these tax-cutting states, policymakers are facing the consequences of tax cuts that so far have failed to produce the promised economic surge. Minnesota, too, is living with the consequences of its actions, but those are much more pleasant — and more promising for the state’s future.

As our report on criminal justice reform explains, most states’ prison populations are at historic highs; in 36 states, the prison population has more than tripled as a share of state population since 1978 (see graph). This growth has been costly. If states were still spending on corrections what they spent in the mid-1980s, adjusted for inflation, they would have about $28 billion more each year to spend on more productive investments or a mix of investments and tax reductions.

The Brennan Center report found that while rising incarceration rates helped reduce property and violent crime rates in the 1990s, the effect was much smaller than some other studies have suggested, accounting for 0-10 percent of the total decline over the decade. Since 2000, rising incarceration rates account for less than 1 percent of the decline in crime rates.

“This report’s analysis reveals that incarceration has been decreasing as a crime fighting tactic since at least 1980,” the authors conclude. “Since approximately 1990, the effectiveness of increased incarceration on bringing down crime has been essentially zero.” Factors such as an aging population, higher earnings, lower alcohol consumption, and smarter police tactics may have done as much or more to reduce crime, according to the study.

We’ve outlined four basic ways that states can reduce their prison populations to free up funds for schools and other investments in human capital: decriminalize and reclassify certain low-level felonies, shorten prison terms and parole/probation periods, restrict the use of prison for parole violations, and divert people with mental health and substance abuse issues out of the system altogether.

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The Center on Budget and Policy Priorities is a nonprofit, nonpartisan policy organization working at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals.